What is a Foreclosure?

The action of taking possession of a mortgaged property when the mortgagor fails to keep up their mortgage payments

Before we take a look at how foreclosure impacts residential real estate market, let’s take a look at what it is. What is foreclosure?This is legal process that involves a lender trying to recover his/her balance of a loan from a borrower who has just stopped repaying it by forcing the sale of assets that were used as collateral of the loan.

Understanding the concept of foreclosureInitially, mortgage lenders obtain a termination of a mortgage borrower’s equitable right of redemption either by operation of law or by court order. In most cases, a lender obtains a security interest from a borrower who mortgages or wishes to pledge an asset like a house that will secure his loan. The courts of equity have a mandate to grant a borrower the equitable right of redemption in case the person who has borrowed the loan manages to repay the debt. This happens if a borrower defaults and a lender tries to repossess his property.

Although this equitable right exists, it is a cloud on title. This means that a lender cannot be sure that they can successfully reposes any property. It is through this process of foreclosure that lenders seek a foreclosure to immediately terminate equitable right of redemption and then take both legal and equitable title to properties in fee simple.

The owner’s right of redemption for other debts can also be foreclosed by other lien holders. This includes the overdue taxes, unpaid bills of a contractor or the dues of overdue homeowners’ association.

If you are wondering what a foreclosure process entails, consider banks or other secured creditors selling or repossessing real property after its owner has failed to observe a written agreement between a lender and borrower. That is what a foreclosure process is all about.

In most cases, the violation of a mortgage is always a default in payment of a promissory note. This is always secured by a lien on a property. If he so desires, a lender can sell all properties and keep the proceeds that will pay off its mortgage and any legal costs as soon as the entire process is complete. In this case, it is said that “the lender has foreclosed its lien or mortgage. In case there was a promissory note that was made with a recourse, the mortgagee can file a claim for a deficiency judgment if sales do not bring enough to pay off an existing balance of principal and fees.

In most areas, items that are included to calculate how much the deficiency judgment is include the loan principal, accrued interest and attorney fees less the amount a lender had bid at a foreclosure sale.

Impact of Foreclosures on residential real EstateWhen the number of foreclosures is high, it can have serious consequences for neighborhoods in which houses are located. This is if the foreclosed home remains vacant for a considerable amount of time and no one keeps it well-maintained and secured. In most cases, tittles to the property will have to be transferred back to the servicer. Lenders have powerful incentive to avoid a prolonged vacancy or deterioration if the neighborhood still enjoys a strong market conditions.

There is a potential profit if a house is sold quickly. Lenders will also want to keep the entire property in good condition while it is still in the market.

This incentive will only disappear if a foreclosed home is in a neighborhood where there is a large backlog of unsold homes or where a home value is low and declining. The lender may try to minimize expenditures of maintenance and security. It is important to note that any legal process that leads to a foreclosure can be a costly undertaking since it involves paying attorney’s fees and cover property management and other added services.

Other lenders try to get residents to move out without a formal eviction by offering them “cash for keys”. The person lending the loan may also decide that a least costly approach is to simply walk away whether the home in question is occupied or not. This means a property will be in a sort of legal limbo and unattended.

In case a property is vacant and it looks like no one is taking care of it, real estate agents and other prospective buyers will consider this as a symptom of potential decline in property values and neighborhood distress. Although a modest amount of under-maintenance may not have that much effect, unsecured properties can be invaded by squatters, gutted of valuable fixtures and appliances or vandalized. This is what leads to unsecured homes becoming drug houses. This negatively affects real estate since any appearance of a disorder may increase risks for all types of crimes for residents living in the neighboring apartments and homes.

A building is bound to deteriorate physically if its period of vacancy is extended and no one is paying for electricity, heat or maintenance. Any property in this state is also vulnerable to structural fire, indoor fires that is set by squatters to keep warm may get out of hand.

One or two foreclosures may not have a major impact or cause much of concerns since neighbors, with considerable equity in their homes, are bound to exert great pressure on the government, owners of the affected properties and anyone else who might be able to correct this problem. However, if the number of foreclosures escalate from a few to dozens, this problem may become more serious and hard to correct at a later stage. A small number of foreclosures in a neighborhood where property values are already at a decline may accelerate this trend.

That said, you need to understand that some foreclosure sales appear to self-perpetuate. This means that as soon as one homeowner goes into default, others nearby seem to follow. If a homeowner in default abandons or is evicted from his property, his lawn isn’t mowed, deferred maintenance takes over and his deserted home falls into disrepair. Another drawback to buying foreclosures is the fact that properties are sold “as is,” and people buying have no guarantee of condition.